Among other reforms, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires that upon final adjudication of a federal securities action, the court shall include in the record “specific findings regarding compliance” with the federal rule providing that attorneys’ must present accurate and non-frivolous pleadings to the court. If the court finds the rule has been violated, it must impose sanctions on the offending party or attorney.
The PSLRA’s required sanctions review is more honored in the breach than the observance, with federal judges generally declining to provide the specific findings unless prompted by a party. In turn, parties rarely make these requests because they believe there is a slim likelihood of sanctions being imposed. The recent decision in Tai Jan Bao v. Solarcity Corp., 2017 WL 878226 (N.D. Cal. March 6, 2017) illustrates the issue.
In Solarcity, the plaintiffs alleged that the defendants had engaged in an accounting fraud. The court dismissed the complaint based on a failure to adequately plead scienter (i.e., fraudulent intent), but allowed the plaintiffs to revise their pleading. Two more versions of the complaint were dismissed on the same basis, the last dismissal with prejudice. Following the entry of the final judgment, the defendants moved the court to amend its judgment by imposing sanctions, arguing that the complaints lacked any factual basis and the plaintiffs’ counsel had failed to conduct a reasonable inquiry.
The court held that the complaints, although failing to satisfy the PSLRA’s pleading standards, “did not raise the types of objectively baseless and frivolous claims that have been the subject of fee awards.” Moreover, the court found that the plaintiffs’ counsel, by hiring investigators, conducting interviews of former employees, reviewing public documents, and retaining an expert, undertook a reasonable investigation into the dismissed claims.
Holding: Motion to amend the judgment by imposing sanctions denied. (The court also denied the plaintiffs’ request that the defendants pay their attorneys’ fees incurred in opposing the sanctions request.)